Rumors of buyout talks drive Safeway stock gains

Safeway Inc. shares have climbed for two straight days on speculation of a buyout offer just weeks after the grocery giant deflected another potential takeover.

Buyout rumors erupted this week on reports that private equity firm Cerberus Capital Management was involved in discussions to acquire some or all of Safeway, which also operates the Vons and Pavilions chains. Cerberus currently owns a supermarket business that operates Albertsons and Shaw's.

Investors responded by snapping up Safeway's stock, which rose nearly 10% this week to close at $36.06 on Thursday. Analysts said an acquisition by Cerberus would create a coast-to-coast grocery giant.

"There may be some thought to the beginning nucleus of a true national supermarket chain," said Jim Prevor, a food analyst who edits the website the Perishable Pundit. "Up until this point America has never really had that. Wal-Mart is sort of the first one."

If Cerberus did buy Safeway, its combined supermarkets would dominate 12 out of 15 major markets in the country. That kind of clout would give the traditional grocery industry an edge against rivals such as Wal-Mart and Target.

Safeway spokeswoman Teena Massingill declined to comment. Cerberus could not immediately be reached for comment.

Speculation about a pending deal was first reported by Reuters.

The buyout interest comes at a crucial time for the Pleasanton, Calif., company as it seeks to revamp its business in the face of fresh competition from rivals such as dollar stores and big-box retailers.

Safeway announced this month that it is exiting the Chicago market following lackluster sales. The grocer also agreed this year to sell its Canadian operations for $5.6 billion and raised an additional $230 million through an initial public offering of its gift card provider, Blackhawk Network Holdings.

Like many traditional grocers, Safeway has been scrambling to update its stores and programs to hold on to customers with ever more shopping options both online and at brick-and-mortar stores.

Retail chains Wal-Mart Stores Inc. and Target Corp. have aggressively pushed into the grocery business. Dollar stores and drugstore chains have also upped the amount of fresh food and produce on offer. Amazon.com is getting into the game by expanding its grocery delivery service to Los Angeles this year.

At the same time, upscale supermarkets such as Bristol Farms and discount chains such as Aldi are wooing shoppers as well.

"Being a traditional grocer is only going to become more difficult," said Craig Rosenblum, a partner at food retail consulting firm Willard Bishop. "You have to have a discernible point of difference in the eyes of shoppers."

Although Safeway has struggled in recent years, there have been signs of a turnaround in the last few months, industry watchers say.

Its same-store sales have climbed as the company focused on remodeling its stores and offering more healthful fare. A new loyal program called Just for U also gained traction along with a partnership with gas stations to offer fuel rewards.

"They have really not so much competed with Wal-Mart as become the anti-Wal-Mart," said Prevor. The influx of cash from the company's recent deals, combined with Safeway's substantial real estate holdings, makes the company an attractive buyout target, industry watchers say.

Just last month, Safeway adopted a so-called poison pill strategy to prevent a hostile takeover after learning that hedge fund Jana Partners had acquired a 6.2% stake in its shares. The plan allowed existing shareholders to buy more stock at a discounted rate. Jana disclosed that it had held talks with Safeway regarding "strategic alternatives."

Industry watchers predict that a takeover may come quickly, before Safeway executives have time to spend some of the new cash.

"They have about $4 billion on their balance sheet right now," Rosenblum said. "Whoever is looking at them wants to control that cash and not have to worry about whether that is invested."

A new owner willing to invest in the future of the grocery industry could be a boon to Safeway.

"Safeway and all supermarkets are looking for a way to navigate the future," Prevor said. Otherwise, traditional grocers face "death by a thousand cuts."

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